Sam Bankman-Fried, FTX and the Beginning of the Ice Age of Cryptocurrencies

A few months ago, cryptocurrency exchange FTX was valued at around $32 billion. His brand was stamped on the Miami Heat arena and on umpires during the World Series. Tom Brady was selling it during the Super Bowl.

Now, FTX is failing. More than a million creditors could have lost their money. And FTX founder Sam Bankman-Fried is facing the possibility of civil or criminal charges.

The spectacular crash of FTX is sending shockwaves through the world of finance and business, but it is particularly bad for the future of cryptocurrencies. Bankman-Fried — or “SBF” as he’s known in cryptocurrency land — was the industry’s whiz boy, the friendly face leading the charge of integrating cryptocurrencies into the mainstream financial system.

Liz Hoffman, business and finance editor at Semafor, said Today, Explained guest Sean Rameswaram that, with Bankman-Fried fallen on hard times, the integration effort is likely delayed by years, if not more. “I think, you know, we’re talking a lot about crypto winter,” he said.

Below is an excerpt from the conversation, edited for length and clarity. There’s a lot more to the full podcast, so listen up Today, Explained wherever you get podcasts, including Apple Podcasts, Google Podcasts, Spotify and Stitcher.

Sean Rameswaram

Liz, I think a lot of people around the world who aren’t investing in cryptocurrencies feel like it’s all smoke and mirrors and too wild for a West. And this story somehow confirms it. But you are telling us that these are the two biggest players in the cryptocurrency industry. How is everything so fake?

Liz Hoffmann

It’s like a fairy tale as old as finance. This is exactly what happened with Lehman Brothers in 2000: for example, it eliminates wallets, tokens and weird crypto jargon. This is exactly what happened with Lehman Brothers. That’s exactly what happened with Washington Mutual. That’s exactly what happened in 1929, which is that people took to skiing. There has been a loss of faith in the system and it has been a run on the banks.

You know, no financial institution has their customers’ money in a safety deposit box. That’s not how it works. They lend it. They invest in things. But there are all these rules trying to keep them on track. They should have a certain amount on hand that if you show up at the bank tomorrow and say, “I’d like my deposits back,” they’ll give it back to you. If they fail, it will trigger a huge panic. And that’s basically what happened here. It’s a little less clear where the money went and if there’s any underlying crime, but the way it’s been exposed is just basic financial stuff.

The crypto bros claim they live off the system, like “You are a bunch of idiots, they are lying to you and using you man, and we are creating this brand new financial system from the ground up that is going to be egalitarian and utopian and it will be great.” But there’s no escape velocity. Gravity still applies. And they’ve been brought down by a very simple problem, which is that they’ve run out of money.

Sean Rameswaram

And you’re comparing that to Lehman Brothers and Washington Mutual, which is the Great Recession. Who gets screwed here and how much is screwed?

Liz Hoffmann

There are two bucketloads of people who get screwed, and they both get screwed pretty bad. I mean, an analogy that might be helpful here is — I’m a kid of the 80s and 90s — Chuck E. Cheese.

You’d give them money, buy chips when you walk in the door, and then use them for all kinds of fun Chuck E. Cheese stuff. And when you left, if you had any chips left, you could give them back and they would give you money back. If you had a lot of tokens — if you were like a superpowered Chuck E. Cheese user — you kept a bunch of your net worth in Chuck E. Cheese tokens because you always go there. If Chuck E. Cheese goes bankrupt, you would lose a lot of money because you are holding all these tokens that you were planning to use in the system or exchange for cash and they have no value. These are the people who bought FTX tokens, so crypto bros, right? Mostly outside the US, I should say.

The other group is the people who own Chuck E. Cheese. These are the investors of FTX. And they had raised money from a who’s who in Silicon Valley. These big venture capital firms, one of which, Sequoia, invested in this last week at a valuation of $32 billion, cut the stake down to zero.

Sean Rameswaram


Liz Hoffmann

So they will lose money. Their investors are pension funds and university endowments. So there’s some knock-on effect here. I don’t want to belittle the losses that real investors will suffer. That said, I don’t think this is like a contagion. I don’t think this affects the broader economy. And partly because, by design, cryptocurrencies weren’t connected to the economy. Cryptocurrency entrepreneurs are so dismissive of the mainstream economy and the mainstream financial system that they largely live outside it.

The thing about Lehman is — and, you know, AIG and those companies in 2008 — they were incredibly connected to the normal financial system in ways that people didn’t appreciate. Everyone was like, “Oh, AIG is just like an investment bank. They are doing their Wall Street thing. Hand. It turns out they had depositors and customers all over the financial system. Everything was massively intertwined. There was a lot of debt. And so when the thread was pulled, the whole sweater came unraveled.

I don’t see that happening here. I think we are talking a lot about crypto winter. I think this is probably a cryptocurrency ice age that is coming and people are going to lose money. And the whole industry, to the extent that you think it has long-term value. I’m still a bit agnostic about it. I don’t know, this is a bad day for that.

Sean Rameswaram

Do we think the government is paying attention to this? Is there a chance that cryptocurrencies will become more regulated as a result of this massive fallout?

Liz Hoffmann

Yes, and I think the government really wished they had paid more attention a year ago. This was a bit of a stepping stone to Washington, DC. It wasn’t clear who should be looking at it, because there’s a school of thought that says, “No, this is just like a stock or bond by another name. It should be regulated like any security you would buy or sell. The other is: “It looks more like gold or cattle. It’s more of a commodity.” No one can really figure out what it was. And so the bottom line is that it wasn’t very heavily regulated.

There were certain things you couldn’t do. You can’t market tokens to US investors, which is why most [Bankman-Fried’s] the customers were abroad. But I think there is a very good argument to be made that regulators were asleep at the switch, very slow to act. I think that will change very quickly.

Sean Rameswaram

How do you think cryptography recovers from this moment where, I don’t know, it looked like it was confirmed that the emperor actually had no clothes?

Liz Hoffmann

Extremely naked emperor. Um, there’s a chance it doesn’t.

Sean Rameswaram


Liz Hoffmann

There is an argument to be made that there is, fundamentally, value in technology, that the financial system is just incredibly inefficient, that it’s just stupid and relies on a lot of paper and a lot of trust, and that you could build a more efficient kind of of trustless system where the code did the job that hundreds of thousands of people do in the financial system. I think there’s some value in that, and I think the underlying technology will probably continue to exist and evolve here. Not sure if there is a need for these stupid tokens.

So there are some good pieces of the technology, and I think they’ll be fine. You know, go back to 2001: a lot of the stupid dot-com companies were wiped out, but it laid the foundation of fiber optic cables, broadband and e-commerce. And Amazon was the winner there. But eventually someone will come in and look at the wreck and say, “You know what? These are the good bits. I’m willing to put some adult institutional money behind it,” and they’ll start to rebuild.

(Disclosure: This August, Bankman-Fried’s philanthropic family foundation, Building a Stronger Future, awarded Vox’s Future Perfect a grant for a 2023 reporting project. That project is now on hiatus.)

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